Charity at bargain prices.

• Author: Rhine, David S.

Everybody likes a bargain. IRS Letter Ruling 200002011 now expands the opportunity for bequests to charity at a "discount."

Sec. 691(a)(1) requires that items of gross income not properly includible in a decedent's income tax return during his life be reported as taxable income by the recipient. This type of income is known as income in respect of a decedent (IRD). IRD--qualified plans, various forms of deferred compensation and stock options--is making up an increasingly large part of clients' estates.

IRD can be very expensive to collect. If a marital deduction is not available, the estate tax must be paid on the full value. That amount is then subject to income tax when collected; a deduction for Federal estate tax is allowed, but the resulting tax is still substantial.

Example: The following calculation shows that almost 80% of income can be lost to taxes:

Estate tax: IRD $1,000,000 Federal and state estate tax (55%) $ 550,000 Net after taxes $ 450,000 Income tax: Gross amount $1,000,000 Deduction for federal estate taxes (net of state credit) $ 390,000 Taxable income $ 610,000 Tax (40%) $ 244,000 Total taxes: Estate tax $ 550,000 Income tax $ 244,000 Total taxes $ 794,000 Many clients provide for charitable bequests under their wills. The opportunity has long existed to designate a charity as the beneficiary of a qualified plan. Rather than giving the...